Scottish Court of Session Decisions

The Bankruptcy and Cessio (Scotland) Act 1881 (44 and 45 Vict. cap. 22), sec. 6, enacts—“Notwithstanding anything contained in the Bankruptcy Acts, the following provisions shall have effect with respect to bankrupts undischarged at the commencement of this Act, and to bankrupts whose estates may be thereafter sequestrated, that is to say—(1) A bankrupt shall not at any time be entitled to be discharged of his debts, unless it is proved to the Lord Ordinary or the Sheriff, as the case may be, that one of the following conditions has been fulfilled—( a) That a dividend or composition of not less than five shillings in the pound has been paid out of the estate of the bankrupt, or that security for payment thereof has been found to the satisfaction of the creditors. ( b) That failure to pay five shillings in the pound, as aforesaid, has in the opinion of the Lord Ordinary or the Sheriff, as the case may be, arisen from circumstances for which the bankrupt cannot justly be held responsible…(3) Any deliverance of the Lord Ordinary or Sheriff, as the case may be, under this section shall be subject to appeal in the manner provided in sections 171 and 170 of the Bankruptcy (Scotland) Act 1856: Provided always that the judgment of the Inner House of the Court of Session on any such appeal shall be final and not subject to review”

On July 3, 1905, the estates of John Wanliss Bell, sheep dealer, were, on his petition, sequestrated by the Sheriff-Substitute at Perth ( Sym), and on July 18, 1905, William Finlayson, secretary of Macdonald, Fraser, & Company, Limited, auctioneers and live stock salesmen, Perth, was appointed trustee. No dividend was ever paid by the trustee.

In October 1907 the bankrupt presented a petition in the Sheriff Court for his discharge. Objections were lodged by the trustee and by Macdonald, Fraser, & Company, Limited, averring the failure to pay a dividend, the bankrupt's neglect to keep proper business books, and his refusal to make a spes successionis available for his creditors.

The trustee reported, inter alia, as follows:—“(1) The bankrupt has made a fair discovery and surrender of his estate, except that he refuses to make available for his creditors—( a) An estate belonging to him in expectancy, namely, his hope of succession on the death of his mother (a lady whose age at present is about 65), to funds held in trust under a joint settlement by the bankrupt's parents, dated 3rd July 1891. By that settlement the whole estate of the bankrupt's parents (with the exception

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of some Australian bank shares which had belonged to the mother) is on her death to be divided into cash so far as necessary for purposes of division and subject to expenses to be applied in setting aside a legacy of £1000 for the three younger daughters equally, share and share alike, and the remainder is to be divided equally among the whole surviving children. The Australian bank shares are to continue to be held in trust for behoof of the daughters who may survive their mother and be unmarried at her death till their respective marriages or deaths. At the marriage of the last survivor of such daughters the bank stock is to be realised and divided among the then surviving children. The children of a child predeceasing the survivor are to succeed to the portion which their parent would have taken. The bankrupt is one of six children who survived their father. The father's estate alone amounted to £2700… (4) The bankruptcy has arisen from culpable conduct on the part of the bankrupt. He carried on business from about the year 1894 as a dealer in live stock (chiefly sheep and cattle). His business appears to have been throughout the twelve years a series of speculations in the fluctuations of market prices of such stock. He never at any time made up a balance sheet, but his own story is that partly through the bad season of 1901 he was thenceforward embarrassed for money until he applied for sequestration in 1905. Yet he continued all the while to speculate as before. (5) The bankrupt kept no proper business books, and in particular no cash book or account of money received and paid by him. When called upon to deliver up his business books to the trustee the bankrupt gave up as all he had three bank pass books and three pocket diaries. The diary entries were not regular or complete, and ceased altogether in April 1904. He was then being pressed by his creditors more than before. His bank book shows that his turnover was above £4000 a-year. He said at his public examination that he had bought as much as £1000 worth of stock in one day. His liabilities at the date of sequestration according to his state of affairs amounted to £1003, 9s. 5d. (6) No dividend or composition has been paid to the creditors. The assets as stated by the bankrupt were £142, 11s. 9d., but the gross sum recovered by the trustee was £156, 19s. 5d. This fund was lost in an endeavour by the trustee to recover the bankrupt's legitim from his father's testamentary trustee.”

On October 22, 1907, the Sheriff-Substitute appointed a copy of the petition and report to be transmitted to the Accountant in Bankruptcy, that he might report whether the bankrupt had fraudulently concealed any part of his estate or effects, or whether he had wilfully failed to comply with any of the provisions of the Bankruptcy (Scotland) Act 1856.

The Accountant in Bankruptcy reported as follows—“… The Accountant has examined the sederunt book, and he begs respectfully to report to the Sheriff that, so far as regards the two points specified in the Sheriff's interlocutor, viz., ‘fraudulent concealment,’ and ‘wilful failure to comply with any of the provisions of the Bankruptcy (Scotland) Act 1856,’ he has nothing unfavourable to submit. The trustee qualifies his report by a reference to the bankrupt's refusal to make available for his creditors (1) a spes successionis under a joint settlement of his parents, and (2) a portion of his salary as land steward or manager of a sheep farm.”

The Sheriff-Substitute, on December 19, 1907, pronounced an interlocutor finding that the bankrupt's failure to pay a dividend of five shillings in the pound had arisen from circumstances for which he could not justly be held responsible, and that he was entitled to his discharge, but postponing the granting of the same till March 3, 1908.

Note.—“The sequestration of John W. Bell was awarded upon his own petition on 3rd July 1905.

“The trustee is Mr Finlayson, cashier of Macdonald, Fraser, & Company, the creditors who now object to the discharge. The claims lodged with the trustee amounted to £690. But they would have been greater had a relative lodged a just claim. The assets realised amounted to £169, about £15 more than the sum at which the bankrupt estimated them.

It appears from the report of the trustee that the bankrupt has attended the diets of examination; also that he has made a fair discovery and surrender of his estates ‘except’ that he refuses to assign a certain spes successionis. That is not part of his ‘property’ or ‘estate’— Reid v. Morison, 20 R. 510. The subject is referred to below.

The Accountant of Court, to whom a remit was made, reports that upon the matters of fraudulent concealment or of wilful failure to comply with any of the provisions of the statute he has nothing unfavourable to submit, but reserves to the Sheriff-Substitute any questions arising as to the making available any or all of what may be contained in the said spes successionis.

Thus the reports are to some extent favourable to the bankrupt. But then the estate has not paid a dividend of 5s. per £1 of the debts. It is the duty of the Sheriff ( Bremner, 3 F. 1114) to consider whether the failure to pay the creditors a dividend of 5s. per £1 is due to circumstances for which he is not responsible, even if the trustee give a not unfavourable report and the creditors do not oppose. A bankrupt is not entitled to his discharge on merely producing favourable reports.

In this case the Sheriff's duty is increased. This trustee's report has unfavourable features. The Sheriff-Substitute has thought it his duty to read carefully the report of the examination of the bankrupt, and to consider his conduct and the matters which have occurred since the sequestration.

Grave objections are stated.

(1) The Sheriff-Substitute takes first the matter of alleged reckless trading. The dealings of the bankrupt were chiefly in sheep, but also in cattle. They were at

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times considerable in amount. The great bulk of them was conducted at the mart of the objecting creditors. Now, this kind of business is often speculative, and when it is so it often consists very much in buying at a mart merely to speculate on the ‘turn of the market.’ The stock is bought to be immediately resold if the market rises, and often such a dealer knows that he cannot keep the stock and must sell at a loss even if the market falls. If there is a course of dealing of this kind to which in the circumstances rashness and improvidence causing loss to others must be attributed, then the Sheriff-Substitute is of opinion that the person so acting ought not lightly to be freed of his debts. In this case he is not of opinion that by any means all the bankrupt's dealings were merely speculative and to be disapproved. It is true that the bankrupt admits that he was somewhat ‘hard hit’ in 1901, which was a bad season for the grazing trade, and it is true that he went on till 1905. But it is thought that on the whole his action does not deserve that he be kept in the status of an undischarged bankrupt for an indefinite time. The view taken is that while there is always risk in such dealings, because the sheep market fluctuates according to weather and many trade causes (which are out of the power of these graziers to shelter themselves from if they are doing business at all), the bankrupt did not act so rashly and unreasonably as to justify severe censure; on the contrary, that part of his dealing was wholesome and would not have been discouraged by the objecting creditors.

(2) Along with the matter just mentioned must be taken the fact that records of transactions kept by the bankrupt were at the very best most scanty and imperfect. It is not an answer to this to say that most of his transactions could be discovered in the books of Macdonald, Fraser, & Company, and so that the defects in his bank books and little memorandum books could be filled up. It is one's own business to be able to give an account of one's own affairs. The Sheriff-Substitute does not leave out of view that the bank book entries cease to give any aid after a date some time before the application for sequestration, and that no memorandum book could be produced after 1904.

Taking these two matters together the Sheriff-Substitute does not consider that the discharge should be refused, but at most that it may for a brief time be suspended.

(3) The next matters relate to alleged means by which the bankrupt could lessen the loss to creditors…

( b) The really interesting and important matter, and the sole matter on which the trustee (as distinguished from Macdonald, Fraser, & Co.) bases his objection to the discharge, is thus expressed by him, viz.—.‘The bankrupt refuses to make available for his creditors a spes successionis under a joint settlement of his parents. This is capable of being alienated and sold for a valuable consideration.’

The answer may be also quoted. It goes beyond what the Sheriff-Substitute considers that he is obliged to decide. It is this, viz.—‘Admitted that bankrupt refuses to assign estate which does not fall under the sequestration.’

The position of John W. Bell, the bankrupt, as to a spes successionis is this, viz., by the joint settlement of his father and mother it is provided that the survivor of the spouses—that is, as the event has turned out, Mrs Bell—has a liferent of this joint estate. The husband's estate amounted to about £2630.

On the death of the survivor the whole estate (always under a certain exception) is to be realised so far as the trustees consider that expedient, and the realised proceeds, after paying debts and the survivor's funeral expenses, is to be applied primo loco in setting aside therefrom and paying to the three younger daughters of the spouses equally among them the sum of £1000. Thereafter the residue of the trust fund (under the certain exception already mentioned) shall be divided and paid over ‘equally to and among the whole of our then surviving children equally, including the said three daughters.’

It will therefore be seen that the survivance of the widow is necessary to a vested right. There is, however, a declaration that if a child die before the surviving spouse leaving lawful children, such children are to take the share which would have fallen to the parent.

The bankrupt has one brother and four sisters.

The amount of the estate of Mrs Bell, the bankrupt's mother, is not so definitely ascertained. But from what appeared in the case of Bell's Trustee v. Bell's Trustee, 1907, S.C. 872, it is evidently not considerable in amount, and it seems to have been for long, if it is not still, locked up in Australian Bank liquidations.

The widow is now 65 years old or thereby. The Sheriff-Substitute was told that she is still in good health. (See proof in Bell's Trustee v. Bell's Trustee, supra.)

If then the bankrupt survive Mrs Bell, he will be entitled at all events to a share of his father's estate. What share will depend on whether all the children of Mrs Bell or only some survive? If any die without issue before her, his share will be larger.

It is here proper to explain the reason why a small dividend has not been paid. It is simply because the £169 which might have availed was spent by the trustee in a litigation. This is said as fact and without imputing blame. The trustee thought that he could have it found that the bankrupt was still entitled to legitim out of the father's estate, and that he (the trustee) could claim it. He failed— Bell's Trustee v. Bell's Trustee.

As matters stand now, the sum the bankrupt may get will be the one-sixth of £1600 out of the father's part of the joint estate, and some small sum of his mother's part. Now, the Sheriff-Substitute thinks that it cannot be denied that people would be found who would give a modest sum of money for this spes successionis,

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receiving from the bankrupt (the trustee is powerless to give it) an assignation which would become valid by accretion if and when Mrs Bell died survived by the bankrupt. The trustee says that that is enough for him. The sequestration could be indefinitely kept up. A ‘prudent trustee’ would take the chance that this asset may fall into the sequestration, for though it do not so fall now, the acquisition of it before the discharge would make it fall under acquirenda. Reliance is placed upon the suggestions of learned judges in the case of Reid, supra, to the effect that ways and means may be found to induce the bankrupt to transfer what does not fall under the sequestration because it is not property, and on the principle of such dicta as this of Lord Adam in a later case ( Leslie v. Camming & Spence, 2 F. 643), which the Sheriff-Substitute thinks was not precisely cited to him, viz.—‘In the case of a spes successionis which has not vested in the debtor, and therefore has not fallen under the sequestration, the only way in which the creditors can reach a valuable fund is by withholding a discharge till the bankrupt consents to assign it’ (Lord Adam must mean by withholding their consent to a discharge).

Special reliance, too, is placed on the case of Bradshaw, 7 F. 249. The matter was very analogous, though not the same. A bankrupt a few months after his sequestration desired to get free from it by an offer of composition, and (tendering a cautioner) he offered to pay 5s. per £1, with the expenses of the sequestration and the remuneration of the trustee. The assets were small, and the debts relatively very large. It looked the best thing the creditors could do. But then the bankrupt had an interest (which seems not to have been vested, but to have been rather of the nature of a protected succession) in the large means of his father. His father had died, but the property and funds were liferented by the father's widow; and the father's widow was 80 years of age, and in infirm health. Most of the creditors were inclined to accept the offer. But a dissentient creditor brought before the Courts the proposition that the offer was not reasonable, because the bankrupt had the said interest in his father's estate, which if realised would enable the bankrupt to pay 20s. per £1. The Court of Session thought that that was a fair description of the offer, and affirmed an interlocutor of the Sheriff holding the offer not reasonable, and refusing the discharge of the bankrupt.

Now the difference both in the question in hand and in the speculation involved in the sale of this spes successionis is easy enough to point out. But it may be derived from the dicta referred to and from that decision that there may be cases wherein the Court will not aid a bankrupt (especially one who is seeking the benefit of sequestration) to be a free man if there be a high probability that the debts will be paid if the sequestration be kept up for a little. The Sheriff-Substitute cannot therefore affirm the naked proposition which lies behind the answers that a bankrupt must get his discharge if the only thing to be said against him be that he could assign, but will not assign, something which does not fall within the sequestration. But does it follow that discharge will be refused whenever the creditors can point to something that could be sold for their behoof? Not so. The Sheriff-Substitute thinks the law to be this—that when it is unreasonable to close the sequestration because what is still in spe is likely very soon to be realised, the Court of Bankruptcy may refuse the benefit of discharge, but that the Court will not do so merely because something may yet come.

In other words, the sequestration may be kept open for a reasonable early certainty, but not for what could fetch little at the time or must be left as a speculation if the bankrupt be unwilling to aid. It must always be remembered that it is the bankrupt's property only that is the creditors' property, and that the sequestration has accomplished its purpose as a diligence when that is ingathered. ‘The Court has power to say on what conditions the discharge should be granted, and there may be cases, as for instance where the bankrupt possesses a large alimentary allowance or a valuable expectancy, in which it would be reasonable to keep the sequestration open unless the bankrupt would agree to some arrangement which would make at least a part of such beneficial rights available to his creditors.’ (Lord President in Leslie v. Cumming & Spence, 2 F. at p. 645.)

In this case the Sheriff-Substitute thinks that he should allow the discharge, suspending it only till the 1st day of March, because of the fact that, though part of the trading was risky, no proper record of the transactions was kept.

He has felt some difficulty in the fact that the result of suspending the discharge even for two months has the effect of keeping the sequestration open on the last matter discussed in this note. That is just the thing which he is against on its own merits.”

The objectors appealed, and argued—The onus lay on the bankrupt to prove that his failure to pay five shillings in the pound had arisen from circumstances for which he could not justly be held responsible—Bankruptcy and Cessio (Scotland) Act 1881, section 6 (1). Not only had that onus not been discharged, but what evidence there was showed that the failure to pay five shillings in the pound was due to (1) the speculative nature of the business carried on by the bankrupt for twelve years before his sequestration, and (2) his failure to keep proper business books which would have shown him what his liabilities were from time to time. That was sufficient qualification for refusing to grant a discharge— Wilson & Company, September 14, 1882, 20 S.L.R. 17; Clarke v. Crockatt & Company, December 8, 1883, 11 R. 246, 21 S.L.R. 180; Neilson, February 12, 1901, 3 F. 446, 38 S.L.R. 328. Further, the bankrupt had a spes successionis which had a market

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value, and which he refused to make available for his creditors. The Court ought, therefore, either to withhold the discharge or grant it on condition of the assignation of the spes successionis—Bankruptcy (Scotland) Act 1856 (19 and 20 Vict. cap. 79), sections 81, 95; Leslie v. Cumming & Spence, February 20, 1900, 2 F. 643, 37 S.L.R. 444; Reid v. Morison, March 10, 1893, 20 R. 510, 30 S.L.R. 477.

Argued for the petitioner (the bankrupt)—The Sheriff-Substitute had held that the bankrupt had discharged the onus which lay on him of showing that his failure to pay five shillings in the pound was due to circumstances for which he could not justly be held responsible. In deciding that question, which was one of fact, the Sheriff-Substitute had materials which were not before the Court. The bankrupt's failure to keep books had nothing to do with his inability to pay five shillings in the pound, while the mere fact that the course of business pursued by him involved risk was no qualification for refusing his discharge. Further, there was no authority for refusing a bankrupt his discharge because he declined to assign a spes successionis or for making the assignation a condition of the discharge. The Court had refused to make a discharge conditional on such an assignation— Blackie v. Peddie, November 27, 1871, 10 Macph. 140, 9 S.L.R. 114; Kirkland v. Kirkland's Trustee, March 18, 1886, 13 R. 798, 23 S.L.R. 546. In the case of Reid v. Morison, cit., the question of the competency of such a course was not decided. Moreover, the Legislature had provided that a spes successionis should not fall into the bankruptcy assets, and had specified certain grounds for the refusal of a discharge, and failure to assign a spes successionis was not one of these—Bankruptcy (Scotland) Act 1856 (19 and 20. Vict. cap. 79), section 146; Bankruptcy (Scotland) Amendment Act 1860 (23 and 24 Vict. cap. 33), section 3; Bankruptcy and Cessio (Scotland) Act 1881, section 6.

At advising—